‘Great Opportunity’ Awaits California Cannabis Insurers: Exclusions Concern Brokers
When California voters approved legal recreational marijuana in November 2016, the state’s insurance commissioner Dave Jones knew he needed to get rolling.
“Shortly thereafter I launched a cannabis insurance initiative, the objective of which was to increase the availability of insurance for the cannabis industry across the supply chain and all of its coverage needs,” Jones said.
His approach was multi-pronged. Jones led tours of cannabis production facilities for insurance executives, convened a public hearing on the sector’s insurance gaps and added more resources within his department to make sure that carriers and brokers were responded to in a timely manner.
A Growing Cannabis Market
Surplus lines carriers were first into the market, but in 2017, California added an admitted carrier and has also seen sureties provide capacity for landlords that rent to cannabis operations.
“We are very pleased with the results,” said Jones, who continues to encourage carriers to enter the market. One of the keys to this effort is dispelling the notion that insurance carriers underwriting for cannabis might risk running afoul of the federal government, which still classifies marijuana as a Schedule 1 drug.
“I took note that the U.S. Senator from Colorado [Cory Gardner- R] met with President Trump, and President Trump indicated that the administration would not be enforcing federal laws against cannabis in those states that have legalized it,” Jones said.
“Although insurers are concerned about federal intervention, I think their concerns are misplaced and I think they should come to the market.” — Dave Jones, Insurance Commissioner, State of California
“We sent out yet another letter to the CEOs of the insurance companies that we regulate, pointing this out and assuring them that the risk of federal intervention is zero,” Jones said.
Despite his efforts, Jones said the federal prohibition is probably tamping down carrier appetite to cover cannabis operations.
“Although insurers are concerned about federal intervention, I think their concerns are misplaced and I think they should come to the market,” Jones said.
Mike Bush, a partner with Cleveland, Ohio-based National Cannabis Insurance Services, said business for cannabis insurance brokers and carriers has been building steadily in California.
“After licenses and regulations are fleshed out, the business operation needs to be fully insured to protect the business’ assets, ” Bush said. “California has been a leader in developing insurance solutions for cannabis operations and we have a number of markets willing to insure cannabis operations,” Bush said.
That said, Bush added there are a number of start-ups in the industry and that things take time to develop.
“So I think everyone is finding things take longer than they thought, and then a rush of activity comes in spurts. Now we are seeing more of a steady stream of insurance applications,” Bush said.
Bush also noted his focus is making sure cannabis operations have the right coverages and that claims are paid out properly.
“Product liability and crop/inventory insurance are the big exposures for a cannabis operation,” Bush said. “Once the right coverages are in place, the claims process follows the coverage form.”
Bush said though that he has already seen carriers put restrictive exclusions on policies without being transparent with the insured.
“It’s very important to review all applicable coverage limitations and exclusions prior to quoting,” Bush said. “If the claims process runs well, given how much public and media attention is being placed on the budding cannabis industry, then our industry will get favorable reviews,” Bush said.
He added his firm is offering insurance products to the cannabis industry in half a dozen states (and growing) with California being a target market.
Prioritizing the Right Approach
One retail commercial insurance broker who has been placing cannabis insurance coverage for more than a decade said he thinks Jones has gotten the insurance market in California off on the right foot.
“I think Dave Jones’s office has done a great job as a state agency to work with this industry and say ‘hey, what are the issues you are facing and how can we address them?’ ” said Michael Aberle, a senior vice president with Next Wave Insurance Services, which offers a full suite of commercial insurance coverages to the cannabis industry.
Aberle is also the chair of the insurance committee of the California Cannabis Industry Association, a group which is working with Jones’s office and insurance carriers to educate cannabis business owners about insurance coverage and risk management best practices.
Aberle thinks there are enough insurance carriers willing to serve the California cannabis market and ample capacity. His concern is more around the area of product liability coverage: how strict California’s regulators are going to be around labeling issues, the litigiousness of the state and the country in general, and as Bush mentioned, a preponderance of insurance form exclusions.
He sees a key coverage issue with labeling. Will marijuana products in smokable or other ingestible forms give consumers the benefits the label promises? And when the consumer is disappointed and litigates, how robust will the cannabis provider’s insurance coverage be in defending the cannabis company?
“I think Dave Jones’s office has done a great job as a state agency to work with this industry and say ‘hey, what are the issues you are facing and how can we address them?’ ” — Michael Aberle, senior vice president, Next Wave Insurance Services
“If you talk to any attorneys in the cannabis industry, the ability to meet the burden on labeling is going to be extremely tough. This is going to open the door to, I wouldn’t call them life shattering claims, but there are going to be enough of them that they could cause the carriers to bounce out [of the market],” Aberle said.
Should the federal government loosen its prohibitions on marijuana, Aberle added, that will create new exposures for those growers and sellers who sell their products across state lines.
“When this becomes legal, the FDA is going to regulate this,” Aberle said. Cannabis companies that envision national distribution in their futures will need to consider the product liability exposure ramifications of that.
“The faster you run to the finish line, you might find out you are so far behind (from a compliance perspective) that you haven’t learned what you need to run that operation,” Aberle said.
A Promising Future for the Industry
Jones said he sees in California cannabis a segment of the agricultural industry that is very well regulated and presents a good opportunity for insurance carriers.
“Part of what I am doing is educating the insurance underwriters that cannabis is a heavily regulated industry. They have to track the product from seed to sale. In some ways, this should give the industry comfort as to who is compliant, who they can know is following the rules and can do the sorts of things that can mitigate risk. I think it’s a tremendous opportunity for the insurance industry and they should take advantage of it,” he said.
The state’s insurance department lists five carriers that are underwriting some aspect of the cannabis industry in California: Golden Bear Insurance, California Mutual Insurance Company, Continental Heritage, AAIS (not a carrier, but they have an admitted program), and California’s State Fund, which is not newly admitted but does offer workers’ compensation coverage to the cannabis industry.
The state lists more than 100 insurance brokers that are currently serving the cannabis industry in California. In mid-August, HUB International, a global property/casualty broker, announced that it formed a cannabis and risk services practice, under its Agribusiness & Farm Specialty Practice.
“There is a huge misunderstanding in the cannabis industry about insurance coverage, which leaves businesses underinsured, or even uninsured,”said T.J. Frost, U.S. Cannabis Segment Leader for HUB.
HUB is offering general liability and product liability insurance, among a number of other coverages and services, including workers’ compensation and crop insurance. &